Digital Goggles

Cleantech has been one of the few bright spots in terms of venture capital investment in 2008. According to The Cleantech Group, a market research and financial services firm, Q3 brought a record-level of $2.6B invested across 158 companies located in North America, Europe, China and India. That’s a 37% increase over the same period last year, and a 17% increase over Q2.

While the category is growing, cleantech investment has been dominated by capital-intensive projects like clean power generation and biofuels. With the economic downturn in full effect and funding being harder to come by, there is a significant opportunity for companies at the intersection of software and cleantech. Software is attractive due to its capital efficiency and scalability. Here are a few categories and companies that I have run across:

	Energy Management - Customers can save hard dollars by adopting solutions that help better manage and monitor energy consumption. Energy efficiency in data centers, PC power management, efficient HVAC systems, lighting management, smart homes, demand response and facilities management are all key areas primed for growth. Companies in this segment include Verdiem, 1E, BigFix, EnergyHub, Adura, Positive Energy and Faronics.
	Carbon Management - Measuring, managing and analyzing CO2 emissions are increasingly garnering customer attention and budgets. Compliance is at the forefront of spurring demand, but not far behind are reputation risk, reduced costs through automation and climate change leadership. This segment is getting crowded fast with north of 20 companies, including Clear Standards, Planet Metrics, Carbonetworks, Carbonops, Supply Chain Consulting, Enviance and Greenstone Carbon Management.
	Trading - The carbon trading opportunity is pegged as the world’s largest potential market. Early this year, New Carbon Finance, a market research firm, predicted that the *US* carbon trading market could be worth $1 trillion by 2020. The market is still in its infancy and riddled with regulatory challenges, but there is significant opportunity across the trading spectrum in everything from risk management to electronic trading to liquidity providers. Companies include CarbonFlow, which is working on a platform to help automate carbon credit creation, broker Cantor Fitzgerald (CantorCO2e ) and Australia-based Tradeslot. We also can’t forget about the US-based exchanges CCX and The Green Exchange. Definitely a segment worth keeping an eye on.
	Solar - Most solar startups are either hardware or services-centric and include installers and manufacturers. As adoption increases there is an opportunity to help consumers and businesses qualify their properties, analyze financial impact, automate permit processes and monitor usage. Companies include Sungevity and Energy Matters. I came across a blog post on this topic that has a good list of companies. See here for details.
	Water Conservation - The United Nations estimates that by 2025, two-thirds of the world’s population will face periodic and often severe water shortages. Software can help monitor and curb water consumption and better manage irrigation and sprinkler systems. An example is California-based HydroPoint Data Systems who builds smart irrigation systems for consumers and small businesses.
	Waste Management & E-waste Recycling - Even with the economic downturn consumers are still spending dollars on new computers, TVs, cameras, cell phones, DVD players and rapidly throwing out old ones. E-waste is one of the fastest-growing waste categories. Consumers in the US throw out roughly 100M cell phones per year and 130K computers per day. With e-waste piling up, there is an opportunity for software to help consumers and large enterprises be smart about recycling, waste management, health & safety, compliance and asset recovery. Companies include Kashless, Soft-Pak, AllMax, Solution Foundry and CellForCash.

This list is by no means exhaustive. The category itself is nascent and it is yet to be determined if these companies can build sustainable businesses over the long haul. It is an exciting time to be a startup tasked with the added mission of making the planet a better place. Feel free to send over additional categories, suggestions and/or companies that I have missed.

Filed under: Cleantech, Software, VC |

I had the pleasure of recently speaking with fellow Rutgers alum Dev Ittycheria. Dev is President of the $1.2B Enterprise Service Management business and a member of the executive management team at BMC Software. He was formerly CEO and co-founder of BladeLogic, a data center automation software company acquired by BMC Software for $800M earlier this year. Dev is a serial entrepreneur and was kind enough to share some of his background and experiences with me. Here are some key points from our discussion.

Entrepreneur vs. VC

Dev has the unique perspective of having spent time on both sides of the proverbial startup fence - VC and Entrepreneur. As an entrepreneur, he co-founded and was CEO of Applica, one of the first venture-backed application services companies (a precursor to what people call cloud computing), which was acquired by Breakaway Solutions. Dev also spent time as an Entrepreneur-In-Residence (EIR) at Bessemer Venture Partners. He joined Bessemer in 2001 after taking Breakaway public a few years earlier. As an EIR, he had three options - start another company, work on new investment opportunities for the firm, or lead an existing portfolio company. He chose starting a new venture and teamed up with a former colleague Vijay Manwani, also an EIR at Battery Ventures. They raised $6M from Bessemer and Battery in September 2001, five days before 9/11, and launched BladeLogic. The rest is history.

Key Success Factors

BladeLogic was a success on many different levels, but there were a few that stand out. First, focused execution was critical. BladeLogic was very focused on a particular segment of infrastructure software - the server change and configuration management market. Next was a rapid and iterative development process that allowed the company to obtain customer input early and often. That was critical to deeply understanding customers’ needs and problems and making sure their products solved the most pressing problems. The last and arguably most important was the sales team. BladeLogic decided to go to market via a direct sales channel and spent a great deal of time hiring and developing the best sales force they could. A strong sales force is a competitive advantage unto itself.

Software vs. Services

As a software product company it’s easy to fall into the services trap. One-off consulting engagements can improve your short-term cash flow, but can distract the company from its overall strategy. This becomes particularly challenging as you sell to large customers who typically demand “whole solutions” and pull small software companies in many directions. At BladeLogic, the key was a disciplined product management strategy that never lost sight of the company’s strategic goals.

Advice for Entrepreneurs

These economic times are extremely challenging for all companies, particularly software startups. If you are an entrepreneur or launching a new company in this environment focus on doing three things:

1. Solve a genuine pain point for the customer. There is a big difference between building products that are “pain killers” versus “vitamins”. With IT budgets tightening vitamins won’t find dollars. You’ll find out rather quickly which camp you fall into.
2. Work on building a *great* team, not just a good one. If you are an enterprise software company, focus on developing the best sales and development teams possible. These two functions are the engines for driving your business forward and will be extremely important to surviving the downturn.
3. Build a defensible technology advantage. Your competition, which will be typically larger and better capitalized, will attempt to bankrupt your company by under-pricing their equivalent products. If you have a true defensible technology advantage that customers care about that strategy simply won’t work. Furthermore, make sure your product roadmap focuses on building features that customers will pay for, not something they wish for, but will not spend any more money on.

Filed under: Software, VC |

Update : I’ve reposted some of my findings in the spreadsheet below. Let’s just say Google Finance isn’t the most reliable.

How are public SaaS companies faring in this economic environment?

Here are some stats that I put together based on Q2 ‘08 earnings data from ten SaaS companies, including SalesForce.com, DealerTrack, NetSuite, Taleo, Omniture, Vocus, Salary.com, Kenexa, Concur and Constant Contact:

• Median Quarterly Revenue Growth : 6.5%
• Median Yearly Revenue Growth : 39.4%
• Median Gross Margin : 69.0%
• Median Operating Margin : -0.9%

Year-over-year revenue growth was rather strong across these SaaS companies. Profitability is another story, but that’s a topic for a separate post. You can see some of the underlying data here.

Now, let’s take a closer look at three earnings announcements from last quarter:

We can’t start a SaaS discussion without first looking at poster child Salesforce.com. Salesforce.com had a good second quarter with revenues of $263M, which was 49% year-over-year growth, and put the company at a $1B+ run rate (a SaaS first). The earnings translated to $53M in operating cash during the quarter, an increase of 53% year-over-year. No major changes on expenses. SG&A and R&D were at 64% and 9% of total revenue, respectively.

Salesforce.com added 4,100 net new customers bringing the total to 47,700. Not only did the customer numbers increase, but so did contract sizes. Of note, Dell signed the largest deal in company history, a three-year global contract. This is a bit surprising given the macro environment today, but increasingly larger customers are requesting these types of deals. Revenue diversification across customer size, geography, industry and services mix also continues to be a top priority for the company. International business now represents 28% of revenue, up from 24% a year ago. Overall, a rather rosy picture for the company in a tough economic period.

Taleo also had a good quarter overall. The company recorded revenues of $38.8M, representing 25% year-over-year growth. Software accounted for 80% of total revenue, 21% growth from a year ago. On the expense side, R&D and sales and marketing costs were flat. Sales and marketing came in at 30% of total revenue. Both R&D and G&A were approximately 19%.

The company added 25 new enterprise customers and 10 enterprise deals with a first-year pricing greater than $250K. Taleo also continued to focus on expanding its international customer base. International revenue came in at 13% of total revenue, representing year-over-year growth of 83%. Last, the company completed a major acquisition of Florida-based Vurv, a direct competitor. The acquisition was partially funded with approximately $44M in cash relating to the proceeds and repayment of $9M in debt.

NetSuite posted solid top-line results for the second quarter. The company’s revenue grew 43% year-over-year to $36.6M. Non-GAAP net loss for the second quarter was $900K, a 34% improvement year-over-year. Cash flow from operations for Q2 was negative $1.8M as compared to positive $1.5M from the previous quarter. This was primarily due to tax liabilities as a result of the OpenAir acquisition. For expenses, product development was 10.6% of total revenue, an increase of 8% mainly due to the additional headcount from the OpenAir acquisition. Sales and marketing was 51%, an increase of also 8% over Q1 as the company is hiring salespeople aggressively along with increasing marketing spend. G&A was 12.6% of revenue for the quarter.

NetSuite has done a good job increasing the average selling price per customer. In Q2, NetSuite added more than 400 new customers with an average annual contract value for new sales at $30K, up from $20K a year ago. International business also increased to 20% of total revenue for the quarter.

Filed under: Enterprise, SaaS, Software |

Sequoia Capital recently made a presentation to its portfolio companies about how to try to survive an economic downturn. Definitely worth a read.

Filed under: Startups and Tech, VC |

Research firm Datamonitor released its annual survey of IT spending this week and predicted that 50% of organizations will be freezing their 2009 IT budgets with another 13% anticipating cuts. Given the turmoil with the nation’s economy and troubled financial markets this didn’t come as a surprise to anyone.

So, how does this affect SaaS companies selling into the enterprise? Let’s take a look at a few key factors and see how SaaS companies stack up.

• Pricing - This is top of mind for most customers today. Customers don’t want, and now are unable to sign, multi-million dollar deals. If that’s your model, then expect longer sales cycles. SaaS solutions have an advantage here since typically they have lower upfront pricing with a recurring revenue stream (e.g. monthly) spread out over the life of the contract. The exception are those SaaS vendors that require multi-year multi-million dollar contracts. From a customer’s view, they fall in the category with the traditional software players and will struggle.
• Criticality - If it isn’t clear whether your solution is a “need-to-have” or “nice-to-have” you’ll quickly find out. Customers will only open their wallets to vendors that help them drive the top line, reduce the bottom line or have significant strategic importance. That’s it. While this isn’t specific to SaaS companies, I thought I’d mention since *most* SaaS solutions aren’t deemed “mission critical” (e.g. CRM). Most customers are still skittish with moving their core systems and data to SaaS. In time, hopefully this will change. Companies like NetSuite are paving the way.
• Flexibility - Customers don’t want to be locked into software. Period. There was an interview a month or so back given by Lawson Software’s CEO, Harry Debes, where he predicted the downfall of SaaS in 2 years time and mentioned this point.
  

  It isn’t about locking people in. People lock themselves in! They see the software, like it, and want it. This is true of all professional software. The cost of moving is too high. As long as it’s working, people are happy to stick with one product.

  I disagree. This is traditional software thinking and it blows my mind. Those days are long gone. Application migration costs are lowering. Vendors who provide significant value, but don’t hold their customers hostage will succeed. The SaaS pay-as-you-go approach is ideal and resonates with many customers.

• Delivery - Customers want to get up and running quickly. SaaS deployment times are typically much lower, especially with single instance multi-tenant approaches. More often than not a customer’s needs will change over time so it’s important to get the software in the hands of the customer as soon as possible.
• Costs - SaaS companies are at a disadvantage here. They have high upfront costs with lower revenues. Customer breakeven is further away. So, if you are a SaaS company keep a close eye on your bottom line and remember cash is king. One benefit is that a SaaS company will have a more transparent and predictable recurring revenue stream. Use that advantage and plan accordingly.

In a future post, I’ll cover SaaS economics and how several public SaaS companies are faring.

Filed under: SaaS, Software |

I’ve been thinking about Virtualization Management for a while so I thought it would be a good time for a blog post, especially since my blogging pace has steadily declined to a crawl.

Virtualization has been all the buzz these days in the enterprise. Gartner expects the number of virtual machines to grow from less than 5 million in 2007 to about 660 million by 2011. What’s the big driver behind this growth? Well, there are a bunch of reasons, but mainly virtualization lets companies stretch their hardware resources and ride the backs of increasing processor power. The days of having one machine running on one piece of hardware are over.

With the proliferation of virtualization comes significant management challenges. Virtual environments increase configuration, monitoring and deployment complexity for administrators. Traditional software for managing standalone machines comes up short in a virtualized environment. Combating “virtual sprawl” has turned into an overhead nightmare. The big platform players, namely Microsoft, VMware and XenSource (acquired by Citrix for $500M in ‘07) offer some built-in management capabilities, but can’t cut it as environment diversity increases. There are functionality gaps across patch, discovery and inventory management. I’ve included a chart from virtualization news site, virtualization.info, to give you an idea of the numerous market segments within virtualization management.

Several startups recognize the big opportunity. Companies like LeoStream, VKernel, Embotics, Enomaly , ManageIQ, Ceedo and Vizioncore are a few that come to mind.

As complexity increases, enterprises large and small will need better tools to manage virtual environments across storage, applications and the desktop. The big platform players have taken notice and the race is on.

Filed under: Software, Startups and Tech, Virtualization |

I’ve been reflecting on a few recent conversations with some former colleagues lately. Inevitably, the conversations always turn to career goals. This is a common theme in mid-career professionals and roughly those in their late 20’s/early 30’s. Why? Most mid-career types have been in the workforce for a few years, say 5 to 10, and are increasingly finding themselves unhappy with their current situation - either compensation, career field or employer. Some are interested in changing career fields. Some are contemplating going back to school. Some just don’t enjoy their day job and the people they work with. More often than not, money is the driving factor behind their unhappiness.

What’s missing? One word, passion. I’m not saying *all*, but most people don’t have passion for what they do. Forget the money for a second. Money is important, but shouldn’t be your driving factor. Hopefully, in time, you’ll be able to make enough money to support yourself and your family. The first question I usually ask when in these conversations is what do you really want to do? You’d be surprised how many people can’t answer this simple question. It’s not easy. Adults usually think in terms of what they can’t do or possible constraints to doing what they really want. That’s b.s. in my opinion. Find something that you really enjoy or interests you. Learn all you can about the career field. Blogs are a fantastic resource. Talk to current employees at companies you are interested in. Use social networking sites like LinkedIn and Facebook. Find out about typical education requirements and work experience. Then go for it, but be patient. You are building a career for the long term.

Here’s a wake-up call for those of us who are pursuing our passion. Don’t expect to enjoy every single aspect of your job. While you may love many parts of your job there may be others that you dread and that’s okay. It’s unrealistic to have such high expectations. No job is perfect. Most people strive for the perfect situation. As they say, the grass is always greener on the other side. The great thing about passion is it will drive you through these obstacles.

I’ll leave you with this. We spend roughly 40 hours per week (most of us much more than that) at work. Let’s say, working 50 weeks per year for an average of 40 years. That’s 80,000 hours of our lives working. Wow! That’s a lot of hours if you think about it. Why not spend that time at something you enjoy and are passionate about?

Filed under: Career, Misc |

One of my favorite books, Bringing Down the House, is finally getting released on the silver screen. For those who don’t know, it’s based on the true story of some MIT card counters that took on the casinos. Exciting read. Definitely check it out.

Here’s info on the movie at IMDB.

Filed under: Random Posts |

The Giants just won the Super Bowl. Wow, what a game! The whole team played great - the entire defense, Eli, David Tyree, Steve Smith, the list goes on and on. Overall a great win. I’ve been waiting for this for quite a while.

Filed under: Random Posts |

Would you rather invest in or build a startup around a great team or a great market? Obviously, it would be advantageous to have both, but that’s usually the exception. It’s a question that’s been debated for quite some time in the Startup / VC world, and doesn’t have a clearcut answer. For this post, let’s take a look at pros and cons to both arguments. I’ll let you decide.

Great team

The famous Venture Capitalist Arthur Rock once said, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product they’ll make a switch.” A good number of VC’s go along with this philosophy and bet on the team above all else. Most also prefer to invest in entrepreneurs that have successful track records. These entrepreneurs either have great teams or have built them in the past. The idea here is to minimize execution risk early on. To paraphrase Jim Collins of Good to Great: great teams understand that they need to first find the right people, get the wrong people out and then get the right people in the right roles. The hope is that the great team will be able to find the fast-growing market somewhere along the way.

Now for the cons. What if the team is too early for the market? That means no matter how good they execute it will be an uphill battle. The sales cycles will be long and ROI unclear. Customers and users won’t be convinced they need the solution at all. The ecosystem you are counting on won’t exist. This happened to a bunch of startups around ‘99/’00.

Great market

Markets are like waves in the ocean. They are unpredictable, change at the blink of an eye, can be much larger than anticipated or die as quick as they came. The hard part for the entrepreneur (and investor) is picking the right wave to bet on. It takes discipline and focus not to choose the wrong one, but if you pick the right one you are in for the ride of your life. A fast growing market will propel your company forward. Customers will be pounding down your door, investors will be pouring money into the segment (further validating it) and buzz will be in the air.

What if you have a great product in a great market, but bad or mediocre team? The product could be the best in the segment, but your team can’t sell or market it. That’s a problem. Opportunity lost. By the time your team figures this out, competitors are already hot on the trail.

While although great teams are *very* important, markets take precedent and are the most important factor to a company’s ultimate success. Inevitably, mistakes will be made along the way so near perfect execution is unlikely regardless, but markets aren’t.

Filed under: Startups and Tech, VC |